“Perfecting your process rather than just being obsessed about achieving the goal”

Recently, we sat down with David Morton to talk about what it means to be an ETF Strategist today. David has been utilizing ETFs for over 15 years in his business ventures, from AdvisorGuide, his advisor-focused subscription-based research shop (www.AdvisorGuideOnline.com, to two mutual funds (Global View Capital Management’s “Tactical Asset Allocation Fund” and Fortunatus Investments’ “Protactical New Opportunity Fund”) where he acts as both an ETF Strategist and a Portfolio Manager.

TT: David, we would like to get some insight from you as a professional ETF Strategist about an ETF-focused investment process, its advantages and challenges. Please describe your investment process.

DM: As a professional investment advisor for over 30 years I’ve learned to focus my investment process on reducing investors’ risk while still achieving their desired investment outcome. I have to tell you that ETFs have helped me a lot in this process!

Our investment philosophy is based on an active tactical management approach designed to answer the following questions: what can go wrong with our portfolio and what can we do to prevent loss and protect our investments? Therefore, risk management is a very important part of our portfolio construction process. It’s always tailored to each client’s specific investment objectives. Portfolio based investments, like ETFs, are helpful because of their embedded diversification, significantly reducing individual security risks.

TT: Please explain the main aspects of you research process, and what do you offer to registered investment advisors?

DM: Our research process provides guidance along two main fronts: ETF selection and ETF implementation. From this we create portfolio strategy templates. AdvisorGuide delivers clear, specific, objective, and timely guidance. This foundation supports building consistent, repeatable, and actionable applications suited to a wide range of needs. We utilize both trend following and momentum (relative strength) methodologies. Our service also provides alerts when an ETF is approaching a critical action point. In summary, we help advisors select, create, implement, and monitor their ETF-based portfolios.

TT: What asset classes are included in your research and investment processes?

DM: All major asset classes that are offered by ETF issuers! We have created dozens of multi-asset class strategies for our clients. In many cases, we also combine different strategies to the same asset class. For example, a portfolio might contain both a long-term trend-following allocation, and a momentum based rotational allocation.

SM: Thanks, David. Can you tell us why you have decided to specialize in ETF investments and become a professional ETF Strategist?

DM: That’s a good question, Steve. The initial driver was based on structural and operational difficulties in managing individual securities-based and mutual funds-based portfolios for our SMA accounts and variable annuities clients. Both of them limited our flexibility to invest globally, and presented risk control issues that are at odds with our vision of good investment practice.

When ETFs came out it was like flashing lights and fireworks for me and my colleagues. ETFs provided the platform needed to overcome these constraints, enabling us to deliver better products much more reliably to our clients. With ETF and Indexing based investing you obtain more confidence in your investment process, and a better control of what’s expected to happen with your investment in the future.

SM: David, you have been among the pioneers of a new investment vehicle – the ETF-based Mutual Funds. What are the main advantages of these funds to investors?

DM: Mutual funds that invest solely in ETFs are gaining popularity. As I mentioned before, benefits from ETFs such as diversification, great flexibility in gaining exposure in asset classes, countries and sub-sectors and provide us the ability to deliver high quality macro-analysis based guidance, by capturing the best investment opportunities without constraints. At the same time, the product provider gets a great benefit from the well-established distribution mechanism of the mutual funds. It’s like you get “the best of both worlds”.

SM: Thanks, David. Good luck with your Mutual Funds businesses! My last question is about your day-to-day needs as an ETF Strategist. Specifically, what tools and sources of analysis do you require? What are the main challenges and the wish list of the modern ETF Strategist?

DM: We are trying to use any piece of information out there that can help us select our ETF investments and effectively manage risk. Our data appetite goes across a multitude of aspects from underlying index construction details to operational and liquidity information about every ETF we invest in. We also pay a lot of attention to the new research publications and tools that become available to ETF Strategists. We always need information that can help our own internal investment process. We require that this information should be: a) actionable, b) comprehensive, c) intuitive, d) easy-to-use, e) less time-consuming, and f) based on a methodology that is repeatable and consistent.

We believe that if we focus on improving our process rather than being obsessed with achieving short-term goals, we will actually achieve our important long-term goals faster and in a more efficient manner.

I would compare an ETF Strategist’s job with a process engineering job. You are constantly building and improving your “machine” – your investment portfolio that is repeatable, consistent, systematic, and contains the least possible number of uncertainties as possible.

Also, I am happy to see that more institutional-grade tools are becoming available to us as ETF Strategists. I found useful the new ETF Strategist services offered by Quantitative Analysis Service. You were able to synthesize your sophisticated quant research into a fast and reliable ETF screening tool that helps us select and monitor our ETF portfolios. We find the QAS risk framework provides a comprehensive, innovative and independent research resource that adds value to our existing in-house research. I would encourage all ETF professionals to give it a try.